As a consequence of increasing concerns relating to foreign direct investments and encouraged by the EU Commission, Luxembourg has recently issued a draft bill of law in relation to the screening of foreign direct investments. In 2019, 50% of EU Member States possessed a method allowing them to block investments from foreign companies on their territory. Luxembourg will soon have a similar mechanism in place to protect its essential interests.
For more than 30 years, Europe and Luxembourg have traditionally been very open to foreign investments. In recent years an increasing awareness grew that some foreign actors can use such investments to control sensitive sectors and destabilize a country. Consequently, the EU established a framework for the coordination for the screening of foreign direct investment (hereinafter "FDI").
Adopted in 2019, the European Regulation (EU) 2019/452 is essentially intended to establish mechanisms of coordination and cooperation between Member States. The European Commission strongly encouraged countries still without FDI controls to establish such a mechanism. Although FDI is, in principle, one of the most important factors for the economic and social development of Luxembourg, the risks of potential abuse must be kept in mind. A screening mechanism is therefore proposed to be put in place by a recently submitted Bill in 2021, and is likely to be implemented in its current version.
The FDI Regime
The purpose of the Bill is to introduce a control and screening mechanism for companies outside of the EU that are interested in taking control of Luxembourg companies in sensitive sectors, where FDI is likely to affect interests of security and public order. Areas included are, for example, resesarch activities, energy, data processing or storage and the financial sector. The responsibility for the screening mechanism is allocated to the Ministry of Economy. It is important to underline that this FDI screening mechanism does not concern investment portfolios or investments between EU member states.
Notion of Control
In order to fall into the scope of the new Bill of law, the relevant foreign investor has to gain the power to directly or indirectly control an entity under Luxembourg law. Therefore, simply investing in one of the critical sectors will not trigger the screening procedure that is envisaged to be implemented.
The Screening Procedure
The screening by the Minister of the Economy is intended to comprise three steps :
non-EU investors will have to notify the Minister of their financing plans before realising the investment.
The Minister reviews the notification and decides if the FDI should be screened, and conditions may be attached to the authorization of an FDI.
The Minister determines if the FDI is likely to affect security or public order
If an FDI is realised without a notification or without having obtained an authorisation during the examination process, the Ministry can require the foreign investor to modify the transaction or restore the previous situation at their own expense.
Even if the screening mechanism proposed by the Bill will complicate and delay some transactions, it is an important step in aligning Luxembourg with geopolitical realities and a necessary measure to prevent the control of sensitive sectors.
Our teams at BONN & SCHMITT are ready to assist you with any questions relating to this new development.